Saturday, November 10, 2012

Rich or wealthy – which are you?

IN
recent years, the level of household debt among Malaysians has been a
matter of growing concern, as the statistics show that the average
person is way over his head in debt.

Based on Bank Negara figures, the typical household borrowing is a shocking 140% of disposable income.

That's
something to think about, as it means that at least half of Malaysians
are struggling desperately with their finances. So, they probably have
very little idea of how they can become financially free, let alone
wealthy.

Incredible, isn't it? Most people we know would like to
be free of financial worries and to enjoy a high standard of living, but
so few seem to get it right.

The journey towards financial
success begins by first knowing where you are. Strangely, many people in
the middle class find it difficult to answer this question: are you
middle class, financially free or rich?

In my latest book, Set Yourself Free: How To Optimise Money and Become Wealthy With Minimum Effort and Risk,
I have talked about the money matrix, an intellectual tool that I have
developed to help you understand the state of your finances and how you
can move towards financial freedom, and eventually wealth. (see chart)

Think
about the various elements in the money matrix for a while, and let the
ideas being discussed here get absorbed into the way you look at money.
How you view these situations will determine what you do to achieve
your goals.

The vertical axis denotes your ability to generate an
active income, which is described as your money-making ability. The
higher your money-making ability, the more income you generate. You can
take steps to increase your money-making ability by focusing your time,
resources and effort on the area that you do best.

Compared to a
general practitioner, a heart specialist is able to generate a higher
income. Likewise, if you are a small business owner, you could
concentrate on becoming a market leader in your industry.
Most
people find it relatively easy to increase their money-making ability.
In fact, some people become absolutely driven by it, thinking that it is
the only way to resolve all their financial concerns. If you are
wondering why so many people are constantly chasing their financial
goals, but never seem to reach them, that's because they are focusing on
making more money but not on optimising what they have!

People
who adopt this mentality will always be stuck in the “rat race”. They
cannot afford to stop working for fear that they cannot maintain their
present lifestyle. If you are one of these people, it may be time to
re-evaluate your priorities.

Money optimisation, as measured on
the horizontal axis of the money matrix, reflects your ability to turn
your active income into assets and then using those assets to support
your lifestyle in the optimal manner. In other words, money optimisation
is about making your accumulated assets work for you. The higher your
money optimisation ability, the more assets you will accumulate and
preserve.
To achieve financial success, you must fully understand
how money making and money optimisation interact with each other. Let
us look at the various sections in the money matrix:

Poor: You
are in this group if you have low money-making ability and low money
optimisation ability. Your income is low and you spend most of it on
your living expenses. If you lose your current source of income, you
risk being unable to look after your basic living needs.

Middle Class: In
this group, you have medium money-making ability and low
money-optimisation ability. Your income is above average but you spend
most of it on a comfortable lifestyle. If you lose your current active
income, you risk being unable to maintain your lifestyle.

Rich: You
have high money-making ability but low money-optimisation ability. Your
income is very high but you spend most of it on a luxurious lifestyle
and your financial resources are not optimised. You will not be able to
maintain this lifestyle if a financial disaster strikes and you lose
your current active income.

When we understand the behaviour that
puts us into one of these three categories, we will be able to take the
right steps to optimise our money. Now, let us look at the column on
the right, which shows the financial health status that a person can
work towards:

Self-Sufficient: If you have low
money-making ability but high money-optimisation ability, you can be in
this category. You may have a low income but you manage your finances
very carefully. You may live a simple life, but you do not have to
depend on anyone else for your survival.

Financially Free: If
you have medium money-making ability but high money-optimisation
ability, you can be in this group. You control your expenses so that
they do not grow in tandem with your increasing income. Instead, you
focus on saving or investing your extra income and as a result, you
manage to accumulate a reasonable size of assets to maintain your
current living standard.

Wealthy: If you have high
money-making ability and high money-optimisation ability, you are in the
wealthy group. You have an extremely high income and enjoy a
comfortable, but not luxurious lifestyle. You turn a very high
percentage of your income into savings and invest it wisely. As a
result, you generate a huge passive income which is more than sufficient
for your living expenses. In addition, you have taken the necessary
measures to ensure that your wealth can potentially last for
generations.

The money matrix is, therefore, a guide to help you
find out if you need to increase your money optimisation ability or
money-making ability to improve your financial position. Without fully
comprehending these two elements, many people feel lost and focus on the
wrong things in their journey to seek wealth.

Let us take the
case of Michael, who has identified himself as belonging to the
middle-class section in the money matrix. Michael wants to get out of
the rat race and be financially free. However, he makes the mistake of
focusing solely on his money-making ability to generate more income, and
ignores all aspects of money optimisation. Michael will end up in the
rich section.

Along the way, if something were to happen to
Michael and he stopped working, Michael may find himself back at being
middle class, or worse, in the poor category.

If there's one
thing which could help you achieve financial freedom, and eventually
become wealthy, it would be this: you must not just focus on making more
money, but must optimise what you have.